Debt after the military: 5 things to know
If you have debt post-service, you’re not alone. In fact, service members and veterans tend to have more debt than civilians.1 Being aware of several key factors can help you manage debt successfully.
Credit score matters
When you were on active duty, lenders may have ignored your credit score—which is an indication of how well you handle your debts—because of your relationship to the military. As a civilian, though, your credit score will be the single biggest factor in your ability to get a loan and secure lower interest rates.
Tip: If you want to know what’s going on with your credit, you can view your credit report for free at AnnualCreditReport.com. You won’t see your credit score, but you will see a breakdown of your debts and payment history. If you want to know your score, there are a few options, though you may be required to pay a small fee.
Credit card debt can pile up
Whether you knew it or not, you may have been protected from high credit card repayment rates while you served, thanks to the Servicemembers Civil Relief Act. When you leave active duty, though, standard interest rates can kick in. Credit card rates are usually well into the double digits, so interest charges can pile up quickly. Paying those bills late—or ignoring them—can damage that all-important credit score. Even carrying a large balance can start to hurt your credit. Try to stay on top of your credit card bills as much as possible, and be sure to read the fine print and know when payments are due.
Some loans are riskier than others
You may be tempted to use nontraditional means, like a payday loan or a pawnshop, to help you pay your bills. You wouldn’t be alone: According to a 2012 survey, 35 percent of military members use these types of services. But you may want to tread carefully. While you were on active duty, the Military Lending Act capped the rates many lenders were allowed to charge at 36 percent. As a veteran, that protection does not apply, and you could be charged as much as 100, or even 500, percent. Those high rates make these types of loans extremely difficult to pay back. That means it’s more important than ever to understand the terms of your loan.
Tip: Before turning to one of these loans to pay off bills, you may want to try other options—like talking to your creditors about repayment plans or extensions, or meeting with a credit counselor.
The VA may be able to help with consolidation
You may consider consolidation as an option for managing debt. Generally, consolidation is when you take out one big loan to cover all of your existing debt, leaving you with one loan to repay, usually with a lower rate. The Veterans Administration does not specifically offer a debt consolidation loan, but it does offer a type of home refinancing that is often referred to as one. If you own a home, this could be an option for you. It may be a long process, since the VA will appraise your house to make sure that including additional debt in a refinancing won’t cause your loan to exceed the value of your home. As with any major financial decision, it’s a good idea to discuss options with a financial advisor or your lender.
Help is out there
If you have Veterans Group Life Insurance, you may be eligible for free financial counseling. Beyond the VA, the National Foundation for Credit Counseling can point you to certified credit counselors. You can also report any problems you might encounter to the Consumer Financial Protection Bureau, which has a division specifically tasked with helping service members and veterans.
- National Foundation for Credit Counseling; Financial Industry Regulatory Authority